No Tax on Tips Act

On May 20, 2025, the US Senate passed 100-0 the No Tax on Tips Act. The bill establishes a tax deduction against tip income up to $25,000. The tax deduction includes requirements and limitations.

The deduction applies to cash tips received during the employee’s course of employment in a job that customarily receives tips. The Act requires the employee to report the cash tips to the employer for purposes of payroll taxes. What are payroll taxes? Current tax law requires that an employee report to the employer cash tips that exceed $20.00 a month.

The no tax on tips deduction includes limitations. An employee whose compensation exceeds a threshold amount in the prior tax year may not claim the tax deduction for tips. The threshold amount for 2025 is currently $160,000. The threshold amount is adjusted annually for inflation.

Current tax law allows an employer a business tax credit for the amount paid on certain tips received by an employee engaged in food and beverage service. The bill expands this credit allowing a credit for taxes paid on tips paid for barbering and hair care, nail care, esthetics, and body and spa treatments.